An auction generally is the process of buying and selling items by offering them up for bid, taking bids, and then selling the item to the highest bidder, wherein a bid is a price offered for the auctioned item by a potential buyer(s), or bidder(s). In economic theory, an auction can also refer to a method for determining the value of an item (e.g., a commodity, a good, a service . . . ) that has an undetermined or variable price. Auctions typically are classified by type. For example, an auction can be deemed as an English auction, a Dutch auction, a sealed first-price auction, a silent auction, a procurement auction, and a sealed second-price auction. In an English auction, participants (or bidders) bid openly against one another, with each new bid being higher than the previous bid. The auction ends when no participant is willing to bid further (or higher), or when a pre-determined “buy-out” price is reached, at which point the highest bidder wins the auction and pays the bid price. In some instances, the seller may set a “reserve” price, and if the auctioneer fails to raise a bid higher than this reserve a sale may not occur. Even when there is no sale (e.g., because no bid reached the reserve price) the seller may still have to pay a fee to the auctioneer.
In a traditional Dutch auction, the auctioneer begins with a high asking price, which is then lowered until some participant is willing to accept the auctioneer's price, or a predetermined minimum price is reached. The bidder accepting the auctioneer's asking price pays that price for the item. This type of Dutch auction is also referred to as a Chinese auction. The term Dutch auction is also commonly utilized to describe online auctions where several identical goods are sold simultaneously to an equal number of high bidders. In a sealed first-price auction, all bidders simultaneously submit private bids, wherein the winning bid is the highest bid, and the winning bidder pays the price submitted for the auctioned item. Bidders in a traditional Dutch auction and a sealed first-price auction typically underbid what they believe the item is truly worth in hopes of getting the item for less. In a silent auction, participants submit bids not necessarily knowing how many other people are bidding or how much the other participants are bidding. The highest bidder wins the auctioned item and pays the price submitted for the item. In a procurement auction, the roles of a seller and a buyer are reversed. The buyer(s) submits a request for a given item, and one or more providers of that item offer progressively lower prices, wherein the provider that offers the lowest price procures the buyer's business.
In a sealed second-price auction (e.g., a Vickrey auction), all bidders simultaneously submit private bids, wherein the winning bid is the highest bid, but the winning bidder pays the second highest bid rather than his own. When more than one identical item is sold, there are two common generalizations of the second-price auction. In a uniform-price auction, all of the winning bidders pay the price submitted by the highest non-winning bidder. Bidders typically will not bid their true value in a uniform-price auction with multiple units. Where identical items are individually auctioned, once an item has been priced, the winning bidder typically is entitled to buy the remaining goods at the same price. Items the winning bidder decides not to purchase are then auctioned again, typically at a lower price. Some bidders may hold back on bidding since later items will commonly be less expensive. However, they risk the opportunity to purchase the item since there may not be another auction, for example, where all items are successfully sold during the initial auction or the seller is not willing to lower the item's price.
An online auction is an auction where participants bid for products and services over the Internet. In the context of electronic commerce (e-commerce), there is a great deal of interest in multi-item auctions of relatively low-value goods to bidders with budget constraints. An example of such an auction is an auction of online advertisements for search terms and content pages associated with search engines. It is widely believed that advertising will be the principal business model for online activity, and that budget-constrained auctions will be the primary means of realizing that revenue stream.
Conventionally, auctions with budget constraints have been considered in the context of privatization of high-value public goods, such as auctions of telecommunications bands. However, the theoretical framework of budget-constrained auctions is substantially less developed than that of unconstrained auctions. This is unsatisfactory both from a theoretical viewpoint and from a practical viewpoint, where the absence of an appropriate framework leads to losses in revenue and efficiency. In addition, many conventional approaches utilized in the economics community are confined to a single-item, a single bidder and/or a flexible budget constraint. For example, one approach contemplates a single-item with multiple bidders and a flexible budget constraints scenario in order to model an efficient redistribution of public goods to the private sector. Other approaches address Bayesian equilibria of auctions with budget constraints and propose all-pay auctions, which, in general, are not suitable mechanisms for online advertisement auctions. In light of the above-noted deficiencies and constraints associated with conventional online auctions, there is a need to improve auctioning techniques to facilitate generating greater revenue for online auctioning.